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energy future hat will be the most common type of renewable energy system of the future—off-grid or grid-W tie? My usual answer is, "Both," meaning that there will just be more of each type, depending on the circumstances. But lately I have realized the most common renewable energy (RE) system of the future might actually be neither of these.

Take computers as a parallel example. Back in the early 1980s, the big question among computer geeks was whether computers of the future would be personal or mainframes— both were available and being used in ever-growing numbers. The interesting part is that neither solution ended up dominating. Something else did—the Internet, an amalgam of both personal and mainframe computers, as well as many things we never imagined. And when you're viewing a Web site through a wireless Internet connection, for instance, it doesn't matter what kind of computer you're using.

Renewable energy systems are similar—we really can't imagine what the future will look like. The eventual widespread system will probably end up as a mixture of both off-grid and grid-tie technologies coupled with some new ideas few have imagined yet. In the future, the terms "off grid" and "grid tie" may just be relics, just as "personal" and "mainframe" are to surfing the Web.

Blast to the Past

Most new technologies first become popular with extreme or fringe applications. With RE, it was independent-minded back-to-the-landers who wanted off-grid systems in remote areas and dedicated environmentalists who wanted to reduce their environmental footprint with batteryless grid-tie systems. But these two markets are very limited in size. The majority of people are "in the middle" and will require more benefits and features to get motivated to spend the money and time to incorporate renewable energy into their daily lives. The solution they choose might be very different than what is currently available, possible, or even legal.

We don't always notice the scale of the changes that occur around us during our lives. As a young child, I remember turning over the telephone to find a sticker on the bottom that said, "Property of Pacific

Telephone." When I asked my father about it, he informed me that everyone leased their telephones from the phone company and paid a monthly fee for each phone used. He emphasized that you could not just take any old phone you found and plug it into the phone lines—it might damage the phone network. I also remember that when the first fax machines and personal computers were being used, the phone company required you to have special "data" phone lines installed with extra fees attached. Consumers had no choice in who provided their phone service—there was no competition.

Today, Pacific Telephone doesn't even exist and consumers now have a choice of phone service providers. Nobody leases their telephones from their service providers anymore. You can plug a fax or computer into a wall jack without causing the phone system to crash. And your "local" service provider might be located in an entirely different part of the country. Yet it all still seems to work fine and, thanks to competition, prices have dropped. The latest trend is to forego traditional hard-wire phones at home. Instead, many people use cell phones or Internet-based phone services. Both wireless and networked solutions coexist side-by-side and also work together.

Fast Forward to the Future

Today's utility companies remind me a lot of the old phone companies. They have many people convinced that permission is needed to connect renewable energy sources to "their" grid, which was actually paid for by the consumers under the utilities' monopoly status. The utilities view renewable energy as a competitor—something they need to control if they have to allow it. And, just like the telephone companies used to do, they want to require special rules and additional fees for using RE. At some point, utilities will realize that they should not only allow the widespread use of renewable energy, but that their very existence requires that they embrace it or face extinction, just like many of the old telephone companies that were slow to change.

The most common RE system 20 years from now might be something that is just as unimaginable as today's Internet was three decades ago. Future-flexible RE systems might connect to a utility network when it makes sense to but also be able to work independently. There might even be independent "open" power networks similar to today's wireless networks, where people can distribute the energy produced by their RE systems to their neighbors or provide RE access to those less economically able to afford it. And the role of the utility in the future might be very different than it is now—if they still exist at all.

At some point, utilities will realize that they should not only allow the widespread use of renewable energy, but that they must embrace it or face extinction."

Beyond utilities, getting people to embrace and utilize renewable energy will require a completely different relationship with electricity—how it's consumed and what its role is. This might sound like a quantum leap, but changes happen all the time—in fact, they are inevitable. The renewable energy industry needs to seek out, invent, and take advantage of all new opportunities to reach more people and make RE a part of everyone's daily lives.

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Christopher Freitas ([email protected]) is a cofounder of OutBack Power Systems, a U.S.-based manufacturer of power electronics for RE applications. Freitas has worked in the RE industry since 1985.

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Financing the Solar Dream

Leases & Power Purchase Agreements by Charles W. Thurston

New financing options—power purchase agreements and leases— are helping homeowners take part in the solar future.

Some homeowners have liquid investments or savings to purchase a solar-electric system outright, spending $12,000 to $60,000-plus. Others borrow what they need through a home-equity or personal loan. But many homeowners without access to cash or credit on that scale must be able to minimize upfront costs to take advantage of the technology. This has prompted installers to bring new payment offerings to the residential market. With moving targets for federal and state incentives, two options—power purchase agreements and leases—could be key to spurring residential solar adoption.

Buying into Production

Power purchase agreements (PPAs) have been a financing tool used for large commercial power projects for decades, enabling developers to secure investor funding based on the end users'—in this case, utilities'—contractual payments for power. SunRun Generation LLC—a San Francisco-based solar energy company—was among the first to adapt this tool for the residential PV market.

Here's how their PPA works: For a fraction of the usual up-front cost, a homeowner can have a solar-electric system installed on their home by one of SunRun's participating installers. SunRun then owns and operates the system, and sells the generated electricity back to the homeowner at a low rate—usually a rate that increases much more slowly than utility rates—for the duration of the lease. Most customers still get two bills—one from the utility and one from the solar company—but, if the system was sized to provide 100% of their energy needs, the utility bill can be essentially eliminated.

SunRun's typical PPA is an 18-year agreement for the customer to purchase all the power produced by the system from the company. The monthly amount can vary seasonally but is generally predictable. Rates for SunRun agreements are typically 13.5 cents per kWh if about one-third of the installed cost is paid as an up-front fee. If a lower up-front payment is negotiated, the per-kWh rate the customer pays is greater. Based on an average utility bill of $100 and an installed system cost of $12,800, a consumer could expect to pay $4,267 up front for a system designed to meet all their energy needs. After the initial payment, the per-kWh cost is guaranteed by SunRun.

SunRun has more than 100 PPAs in California, and is considering expanding its service area within California and into other states. So far, SunRun has few competitors in the residential PPA market, but the competition is increasing rapidly—especially in California, where a law, signed by Governor Arnold Schwarzenegger in September 2008, streamlines the regulatory process for solar companies and developers.

Previously, solar companies had to go through the cumbersome process of registering as a utility with the state of California to use a PPA model. The new legislation (Assembly Bill 2863) removes several hurdles, clearing the way for PPA developments to become more easily installed in the state.

Open Energy Corp., of Solana Beach, is one of the companies that pushed for the new law. The residential solar-power company is helping lead the PPA revolution in California with its "Solar Community" model that uses PPAs to provide rooftop PV systems for real estate developments at no up-front cost to the homeowners or developers.

Last spring, the company broke ground on its first-ever PPA-based solar community at Pacific Station in Encinitas. Through a development agreement with San Diego-based John DeWald & Associates, Open Energy Corp. is financing $480,000 for the installation of 1.2 kW rooftop systems on each of the 47 condominium/townhomes at the mixed-use complex. In exchange, homeowners agree to buy back the solar electricity produced by the system from Open Energy Corp., at a rate lower than the rates of regular utilities. The project is scheduled for completion in 2009.

It's a win-win for all parties, says John McCusker, a representative for Open Energy Corp. The builder receives the tax breaks associated with using renewable energy, along with a faster rate of sale. Solar-equipped homes are selling four times faster in California than regular homes, he says. The solar-electric systems also allow the builder

What-if Scenarios

What if the lease or PPA provider goes bankrupt?

The PV system cannot be repossessed, and the homeowner cannot be held liable for the company's debt. Both SolarCity's and SunRun's financial partners would step in to make sure the systems continue to operate and generate both electricity and investment returns.

What if I want to move?

Both plans allow a new owner to assume the contract and also permit a buyout when a home is sold. (The value-added benefit of having an installed system can come into play here, since that typically translates into higher property value and a higher selling price.) Or the moving homeowner can pay to transfer the system to the new address, assuming it is within the company's service area.

What if my system doesn't produce what it is supposed to?

The lease method provides for a year-end credit if the system underperforms; with the PPA, you only pay for what you generate.

What if I want to upgrade my system?

The contracts only cover current technology. But both companies say that they will work with customers to minimize the costs of any desired upgrades. Neither plan provides for automatic upgrading of systems, even though the performance of newer systems will likely improve as the industry matures.

What if I want to increase the size of my system?

Neither program is designed to accommodate system expansion once the basic inverter infrastructure is installed, and the inverter's rating will limit how many modules can be added to a system. New mini-inverters intended to be integrated with each module could make subsequent expansion easier in the future.

to meet Leadership in Energy and Environmental Design-certification requirements.

But the benefits for the homeowner go beyond no upfront costs. Other pluses include the added resale value for the home, the possibility of selling the house faster, a lower electric bill each month, and the satisfaction of using eco-friendly renewable energy.

Other companies are developing PPA programs as well. Berkeley's Helio Micro Utility entered the residential solar PPA market last summer, and Tioga Energy of San Mateo also launched a PPA finance program. As more institutional investors back solar integrators, PPAs are expected to flourish in the residential market.

"What we're starting to see is that innovative financial solutions from companies like ours will offer grid parity— the point at which electricity produced by PV is equal to or cheaper than grid energy—with some additional cost-savings benefit," says Nat Kreamer, president of SunRun. The company recently received $12 million in venture capital to help expand and fund its residential PPA program.

Leasing the Sun

After a market survey, SolarCity of Foster City, California, verified what most industry professionals already knew: The up-front payment is the largest deterrent to residential solar adoption. In response, the company teamed up with investment bank Morgan Stanley to pioneer a leasing program that makes solar electricity more affordable and accessible for homeowners.

"Our goal was to design a program that made it possible for families to pay less for clean power than dirty power, so they don't have to choose between helping the environment and saving money," says SolarCity CEO Lyndon Rive.

Their solar lease is typically structured as a 15-year agreement with a fixed monthly lease payment for the life of the contract and a guarantee of system production.

Comparison of Leasing & PPA Programs

SoIarCity's Lease_SunRun's PPA

Areas of operation

Arizona, California & Oregon

California

Contract length

15 yrs.

18 yrs.

Up-front cost

$0-$1,000 (0-2% of installed system cost).

Averages about 33% of installed system cost.

Monthly fee

Rate rises 3.5% annually. Utility electric bill savings greater than lease payments. Averages 11.2 cents per kWh over life of system.

Fixed price per kWh generated (13.5-15.0 cents).

Insurance

Homeowner chooses insurance provider.

SunRun insures the system.

Sales & installation process

SolarCity handles system design, financing, installation, maintenance, customer care, billing, and monitoring.

Homeowner chooses among area installers, SunRun partners provide third-party oversight. SunRun handles billing, maintenance, monitoring, and insurance.

System maintenance & component replacement

Free, all-inclusive, and guaranteed. Lessor guarantees kWh production, which motivates appropriate maintenance. Remote monitoring efficiently identifies problems. Provides for inverter or other component change-out when needed.

Free, all-inclusive, and guaranteed. Regular cleaning and maintenance included. PPA obligates kWh production levels, which motivates appropriate maintenance. Remote monitoring efficiently identifies problems. Provides for inverter or other component change-out when needed.

System monitoring

"Smart" metering tracks and micromanages system optimization. Customer can view output and performance status via Web.

"Smart" metering tracks and micromanages system optimization. Free revenue-grade cellular monitoring system tracks system output and ensures optimal performance.

Performance guarantee

Energy output guaranteed over life of system. Allowances for PV module and other system degradation are covered under the contract. Refunds for shortfalls from guaranteed production issued to customer.

Customer receives rebates if system underperforms. Allowances for PV module and other system degradation are covered under the contract. Refunds for shortfalls from guaranteed production issued to customer.

Excess production rights

Homeowner gets 100% of excess production.

Homeowner pays SunRun for each kWh produced.

Options if homeowner sells home

New owner can assume agreement, or homeowner can buy system or pay to relocate the system to the new home—if home is within the company's service area.

New owner can assume agreement, or homeowner can buy system or pay to relocate the system to the new home—if home is within the company's service area.

Contract buyout options

Prorated buyout option at five-year intervals.

Prorated buyout option available after the first year.

Options at contract end

Renew the agreement, purchase system, or upgrade the system under new lease—though costs are not necessarily guaranteed.

Renew the agreement, purchase system, have system removed at no cost, or upgrade the system—though costs are not necessarily guaranteed.

Buyout cost at contract end

Fair market value, typically 20-30% of installed system cost.

10% of system cost.

The lease payment and guaranteed production are largely based on the individual system's size, but other siting factors—including tilt, orientation, and shading—are taken into account. The more optimal the conditions, the higher the guaranteed power production, and the lower the lease payment.

Any production above the guarantee is applied against usage and may earn utility credits. However, such credits are rare, since SolarCity slightly undersizes most systems and primarily targets the most expensive peak utility rates. This keeps the lease payment down and maximizes the savings for the customer. Homeowners can opt to lease a larger system to offset up to 100% of their electricity usage.

SolarCity's lease was just what John and Margaret Stubblebine needed. For years, the couple had been thinking about adding a solar-electric system to their home in Cupertino, California, but the cost kept them from following through with the idea. Then, they heard about the leasing program and figured it couldn't hurt to get an evaluation.

"The assessment showed that we would be spending less for electricity after the solar installation than we would have without it," John says. "With energy prices rising so quickly, the solar lease fixes our costs into the future. So, if—or more like when—electric rates rise steeply, our rate will be stable, and we will save much more money."

Given the Stubblebines' $158 electricity bill, SolarCity recommended a 30-module, 6 kW system that would offset up to 1,100 kWh per month and reduce their utility bill by about $116 per month. After factoring the reduced utility bill and a monthly lease payment of $107, the system delivers a net savings of $9 per month.

Other companies are following SolarCity's lead. BEohana Solar Corp. and Power Solutions of San Jose are also offering solar leases at the urging of the city mayor.

Since the start of its solar lease program in February 2008, SolarCity has tripled its business in the first few months, largely due to an introductory (now expired) no-money-down lease in Arizona, California, and Oregon. Though preliminary numbers look good for leasing programs, not everyone can jump on this bandwagon. As with low-interest financing options for any consumer product, most solar leasing programs require good credit to qualify (typically a credit score of 720 or higher).

Beyond the West, the state of Connecticut rolled out a $39 million solar lease program funded by U.S. Bancorp. Through the Connecticut Clean Energy Fund, a combination of rebates and tax credits will lower the cost of residential solar leasing. This is the first time a ratepayer-funded program has partnered with private financial institutions to leverage federal tax credits, with the goal of making residential solar energy more affordable. The program's aim is to install 1,000 systems for low- and medium-income households in the state.

Weighing the Options

Similarities between solar PPAs and leases are greater than the differences (see "Comparison" table). The key distinction is the cost over the system's lifetime. If cash flow is an issue, the lease is the best way to go, since there can be no down payment. If you can afford to invest up front in part of the system cost, you'll pay less as time goes on, and your savings can be greater at the end of the contract. In that case, a PPA may be more beneficial. However, representatives from both lease and PPA companies insist that the outcomes are not that different at the end of the contract.

"There's no one way that is really cheaper than another," says Mike Hall, president of Borrego Solar Systems, which offers PPAs through SunRun and commercial leases financed by Bank of America. "In the end, there's a certain amount of money that the bank needs to make, and the consumer is going to pay that money. It's just a matter of whether they'll pay it at the beginning, middle, or end, so be aware of the fine print and promises."

To simplify the overall process, California State Representative Mark Leno, of San Francisco, has introduced legislation that would require plain-language disclosures for lease, loan, or PPA offers. Under the proposed law, a state-required disclosure form—like those required for home or vehicle purchases—would take some of the work out of comparing the options. Until then, clear off a large swath of counter space for the paperwork.

One beauty of lease or PPA financing is that it protects you from increases in utility rates for the energy you generate and use. If you return power to the grid, you may even receive increased payments over time as rates rise.

While leases and PPAs are certainly viable options, Hall still encourages homeowners to buy if they can. "Don't underestimate the value of buying a system outright," he says. "The system can appreciate in value and is a good economic investment—but only the owner of the system will have the right to those benefits. With a lease or PPA, you are only entitled to what the contract provides."

Seizing the Solar Moment

A key consideration in choosing to adopt solar technology, be it through direct purchase, a lease, or a PPA, is when, if, and how rebates and tax credits will be continued or reinstated. Even though Congress extended the federal tax credits for eight years, state rebates and tax credits may likely diminish next year.

While a rebate may amount to several thousand dollars for a homeowner who purchases a solar system, the tax credits are mostly of interest to individuals and larger companies with sizable tax liabilities. Not surprisingly, solar companies have aligned themselves with well-funded Silicon Valley and Wall Street firms that seem to have an unlimited appetite for tax credits, which they can repackage in a variety of ways to their customers/investors. That's good news for homeowners who will need the financing assistance that a lease or a PPA provides.

The bottom line is that a solar lease or PPA makes it possible for any homeowner to stop talking about tomorrow and act now. Ask installers in your area about new financing programs, and remember—no matter your financial means, you can seize the solar moment.

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Charles W. Thurston ([email protected]) is a market analyst and writer specializing in new technology, financial trends, and the global trade affecting growth industries like solar energy.

Solar Lease & PPA Programs:

BEohana Solar • www.beohanasolar.com

Connecticut Solar Lease Program • www.ctsolarlease.com Helio Micro Utility • www.heliomu.com Power Solutions • www.solutionsforpower.com SolarCity • www.solarcity.com SunRun Generation LLC • www.sunrunhome.com Tioga Energy • www.tiogaenergy.com

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